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How Much Stock You Should Have in Your Portfolio

April 14, 2016

Last week, a WSJ article had four subsections on how much stock should be in a retirement account, but it actually presented over a dozen conflicting opinions.  This article offers ways you can consider this question.

Whether you are investing in a retirement or taxable account, the principles are the same.  You invest to either make a fortune or to attain long-term financial security.  These articles, and I, do not deal with the fortune part – we are concerned with assisting clients in developing a plan and method to attain financial security based upon their goals.  What people have to understand is that while the feeling of security comes from the amount of assets they might have, the achievement of that security comes from adequate cash flow.

Let’s take someone that needs an extra $40,000 of cash flow.  Person 1 has $1,000,000 in each of their house, art and private equity.  They are worth $3 million but have no cash flow from their assets.  Person 2 has $750,000 and uses it to buy a charity gift annuity that will provide $40,000 per year cash flow with annual increases based on the inflation rate with the payments guaranteed for the rest of their life.  Who is more secure?

Both illustrations are exaggerations, but there is a point I want to make.  Building your portfolio should be based on cash flow needs with a method to grow that cash flow as circumstances change PLUS a rainy day fund available to cover unexpected needs.

Unless you are so wealthy that you will never run out of money, you can never be completely secure in what you do and you will be subjected to risks.  The issue is how to do the best you could knowing everything you know now and have an escape hatch if things turn out unexpectedly on the bad side, i.e. limit your risk.

I am not going to provide a plan here since I have posted many blogs with suggestions of what to consider when providing for your eventual financial security.  A cornerstone of my recommendations is that what you do is clear, simple, low cost and with contained risk.  So, let me talk about these four issues.  You can always look in the archives for the plans.

Clear:  This means that you understand what you will be doing, the goals of what you will do, the sustainability of the cash flow and how you can make or lose on your choices.  This is a minimum for any investment action.

Simple:  What you do should be easy to implement and something that can be done by yourself (after some basic instructions) and which performance can be looked at, at will in real time, from a computer or smart phone.

Low cost:  Costs eat up profits.  I know many people that pay investment managers 1.25% who then invest in mutual funds with another1.25% fee embedded in the funds.  These people do not have a chance.  Many of the large index and exchange traded funds have fees of less than .2%.  Also, excessive trading has profits diminished by trading costs and taxes.

Contained risk:  Risk cannot be avoided but it can be limited.  For example investing in individual stocks is riskier that buying a mutual fund.  Investing in an index fund is less risky than an actively managed mutual fund.  Buying five year bank CDs is less risky than 20 year Treasury bonds.  A question you might consider is whether index funds are riskier than 20 year Treasuries.  What you do depends on your circumstances and your cash flow needs – now and in the future, and cannot be absolutely decided now, but a choice needs to be made now based on what you think the future will be, whether your cash flow needs will be attained, and the level of risk you are comfortable assuming.

Nothing is forever, so everything you do needs to be monitored and looked at regularly and measured against your goals.  I don’t mean or even suggest making frequent changes, but only making changes when life circumstances or the investment climate changes and being alert to your situation.

The answer to the question about how much stock you should have is “it depends.”


One Comment leave one →
  1. 6hawthorne permalink
    April 14, 2016 11:34 am


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